Re-Define Collateral in Digital Lending. Next-Gen is Digitally Rich than Asset Rich. Use NFTs, Block
I had written a Linkedin post long back on this topic, approximately a year from now. You may check the discussion through the above hyperlink.
Here I have explained, how it can work and a few models which I can think of, maybe an expert/practitioner can pick up and take it forward.
Do we need to re-define, “Collateral” in DigitalLending? Is collateral only about something physical? – Isn’t storing contact details from a borrower’s mobile phone collateral? – Isn’t asking for social media information and taking virtual access to mobile phone collateral?
My question is, can someone’s YouTube, LinkedIn, Facebook content and connection quality be used as collateral for a loan?
Ok, Let me explain.
Can I take a loan by pledging my YouTube earnings from my videos and content as collateral? And the lender can then own my earnings till the time I completely repay the loan.
We have seen such things happening through #Blockchain like increasing the use of Non Fungible Tokens (NFTs). This concept is actually working for other industries.
Why insist only on physical collateral? Not everyone has physical collateral, many have social collateral which is worth more than the physical ones. The way physical assets get evaluated, we need trusted companies that can evaluate Social Collaterals too. It needs different thinking and new tools.
Next-generation will Thank us for doing that..
It’s the time when not only tools but even definitions should be redefined.
Ok, a bit more with the background.
The digital economy is on the rise Globally, and eventually, many people are choosing freelance or gig work to earn their living and to get work satisfaction. Few have left their well-paying job to do so, while many started it because they didn’t get a job for a long time, got unemployed, could not work due to family commitments etc to name a few big drivers. People who got successful in this pursuit got addicted to it and never wanted to go back to a full-time job but decided to pursue their passion and profession. Many who did not get much success, got bored, got stuck, got a wonderful job offer etc and left their passion and interest, to join an employer.
People who are in a job, get a loan quickly due to the fixed salary date and amount; however, it’s not true for a gig worker or freelancer who follows his passion. They get evaluated based on their income tax return and not on their potential to earn money from the virtual assets that they have created. And if they mention that they have an online business and not a regular income, they are mostly denied a loan. Thanks to COVID-19, we realised that even a fixed-looking job could end at any point with no surety. However, in the pandemic, people who were working on virtual assignments, online etc, did not get much affected unless their parent industry got threatened.
Lockdown increased the time at home or time on the internet, which means more internet consumption, which means more content. And who got benefitted in the entire thing? The content creators, bloggers, you tubers, movie creations, online teachers etc. They observed an upsurge in their subscription and income, further motivating them to create more content. The entire world economy changed, and we started exploring the new normal, which was virtual. But one thing did not change. The business became digital, mindset could not leave the legacy systems, and banks and traditional lenders still believe that a job is more secure than a gig worker.
The concept With the reduced cost of smartphones and the internet, India is getting into Bharat and vice versa; this cultural and technological transfusion between the two worlds is creating a new and digital India. Technology is reaching everywhere, and we can see a lot of talent, unseen and unheard actors, and professionals on TikTok, youtube, Facebook, bloggers, what’s app, Instagram, etc. These social media tools have become their medium of expression and distribution. We all appreciate it and share it with our network, creating a viral loop and increasing their reach and confidence. Now, these talents want to touch newer heights however, the limited availability of financing restrains them. Most traditional lenders and credit bureaus still rely heavily on salary slips, income tax returns etc. However, many gig workers do not make to the minimum slab of the income tax return and hence are not required to file the return, but they need capital to break that slab and earn more. Through this concept note, the authors want to develop a model which can be used to assess the earnings of a gig economy worker as collateral and provides enough comfort to lenders that their money is safe.
Case in point Imagine a person who is earning an average of Rs. 15,000 (approx 200 USD) per month from youtube, blogging or selling their courses online. If s/he wants to use these assets as collateral with any traditional lender, we know it will probably be a big no. But what about these platforms, can youtube, blogging websites and course platforms assess past earnings and extend a line of credit to these freelancers and gig workers? And as collateral, they can take the right of these virtual assets on which their entire business works on. These virtual collaterals are the raw material for the social media platforms on which they run their business empire.
A few proposed Business models
Single Party Model– These social media platforms extend a cash advance to these people when in need, depending on their past earnings and potential etc, and control the ownership during the repayment period
Two-Party Model – Digital Media platform ties up with a lending company, where the platform helps to get control of the virtual collateral and the data for underwriting, and the lender provides loans at an agreed rate of interest. The platform also shares a % risk. Definitely following the consent architecture.
Three-Party Model – The platform provides information for underwriting, the second party provides a specialised service in assessing the worth of virtual collateral, the third party provides the money. Here the second party’s role can be taken up by the third party as well. All three/two share a % risk.
Any other Model?
What are your thoughts?